LOS ANGELES—Attendees at this week’s Americas Lodging Investment Summit are being treated to multiple views of the hotel industry and its performance, from tightly focused sessions on hotel workouts in every segment to high-level economic outlooks. Monday’s general session featured one of these 30,000-foot views, presented by Todd Buchholz, an economist and former White House senior economic advisor.
According to Buchholz, there’s now a magnifying glass over U.S. trade relations with China, which has forced Americans’ views on trade to shift radically.
“We, of course, knew in the U.S. that so many of our electronics goods were made in China, but until COVID, how many of us knew that most of the ventilators were made in China, that many of the antibiotics were made in China?” he said. “Our entire view of the world economy has sort of been flipped around. In fact, I would say there's been a backlash against free trade. Most countries want to somehow create their prosperity by themselves.”
But, he said, the U.S. economy has a “dirty secret.”
“The U.S. economy was stronger before COVID because economic growth in the rest of the world was weak,” he said. “How is that possible? Because the rest of the world—for roughly the five years before COVID struck—was limping along, worldwide interest rates were near zero. That meant Americans, despite a record low unemployment rate of 3.5 percent, we were able to buy automobiles [with] no money down [at] 0 percent interest. We were willing and able to build [and] buy homes with mortgage rates of 3 or 4 percent.
“That would not have been possible except for the fact that the rest of the world was not doing particularly well.”
Buchholz also pointed out a term created by economists in the 1970s called the misery index, which also helps clarify why the U.S. is in a stronger position as we work to overcome the effects of the pandemic.
“Basically, [the misery index] added inflation plus unemployment,” he said. “Back when this was graded in the Jimmy Carter years, the misery index was 11 percent inflation plus 6 or 7 percent unemployment, a nearly 20 percent misery index. Right before COVID hit in February 2020, the misery index was at an all-time low of just 3.6 percent.”
Rosy Future
What the U.S. has been experiencing in the past year-plus is not a recession, Buchholz said, but what he calls a cessation.
“A recession is when consumers start to pull back, the government raises interest rates, there's excess inventory—unsold homes, unsold cars, boxes and crates sitting around the warehouse, and it takes a long time for those to be sold off and for the inventory to be brought down to get the factories up and going again,” he said. “Our cessation is different. We went through a cessation, not because people have over-speculated, not because the Federal Reserve Board jacked up interest rates too high. It wasn't the 1920s; it wasn't 2008. It was because of a terrible plague and we all stopped shopping, effectively.”
In economic terms, that’s a positive position to be in because it is easier to recover from a cessation than a recession, according to Buchholz.
“In a recession, you have to wait until all those excess cars and washing machines and Peloton bikes, whatever is piled up unsold, they have to be sold and then you can start the factories and call people back to work,” he said. “In a cessation, all you need is an effective vaccine, which it looks like we have with the little asterisk about, obviously, the delta variant.”
Buchholz offered a message of optimism to those gathered in the session.
“I think the U.S. economy is going to continue to recover,” he said. “There are asterisks, there are things to keep an eye on. But the travel and tourism industry is already rebounding strongly in the leisure sector, and now we have to wait for the business sector and the corporate sector to catch up.”
One aspect to keep an eye on is credit card spending growth, which has increased sharply, Buchholz said—and that’s a good thing.
“Some people may look at that and say, 'Oh, my God, Americans, they're so irresponsible. They're spending up their credit cards, it's all going to end,'” he said. “But despite the rebound in spending by consumers, consumers have more money, FICO scores are improving, the amount of leverage that households have is actually looking better, not worse. Consumers have the wherewithal to keep this recovery going.”
This spending pace is closely tied to jobs, he said.
“The pace of job recovery [in the past year] was actually far faster than most economists expected,” he said. “In three months, we regained half of the lost jobs. In the Great Recession that began in 2008, it took two years to get half the jobs back. This has been a very impressive recovery.”